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Social Security Benefits, Finances, and Policy Options A brief overview

Social Security Benefits, Finances, and Policy Options A brief overview. Elaine Fultz, member, National Academy of Social Insurance October 2013. Social Security: a few facts and figures Social Security’s financial outlook O ptions for strengthening Social S ecurity finance. 1.

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Social Security Benefits, Finances, and Policy Options A brief overview

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  1. Social Security Benefits, Finances, and Policy OptionsA brief overview Elaine Fultz, member, National Academy of Social Insurance October 2013

  2. Social Security: a few facts and figures Social Security’s financial outlook Options for strengthening Social Security finance

  3. 1. A few facts and figures

  4. How Many People Receive Social Security? • 56.9 million people receive Social Security each month, in one of three categories: • Retirement insurance • Survivor insurance • Disability insurance • 1 in 6 Americans gets Social Security benefits. Walker, Reno, and Bethell, 2013; Social Security Administration (SSA), 2013a.

  5. Who Receives Social Security? • 36.9 million retired workers • 8.8 million disabled workers • 4.3 million widows and widowers • 2.4 million spouses • 1.0 million adults disabled since childhood • 3.4 million children SSA, 2013a.

  6. How Much Does Social Security Pay?(Jan. 2013) SSA, 2013a; SSA, 2013b; U.S. Department of Health and Human Services, 2013.

  7. How Do Benefits Compare to Earnings? Board of Trustees, 2013: Table V.C7.

  8. How Many People Rely onSocial Security for Most of Their Income? • Nearly 90% of people 65 and older get Social Security. • Nearly 2 in 3 (65%) get half or more of their income from Social Security. • About 1 in 3 (36%) get almost all (90% or more) of their income from Social Security. SSA, 2012a: Tables 2.A1 and 9.A1.

  9. How Are Benefits Projected to Change in the Future? • The increase in the full-benefit retirement age from 65 to 67 between 2002 and 2027 means that benefits will replace a smaller share of retirees’ past earnings. Reno, Bethell, and Walker, 2011.

  10. Increase in Full-Benefit Age (FBA) Lowers Benefits at Any Age They Are Claimed Gregory et al., 2010.

  11. Net Social Security Replacement Rates Will Fall Medium Earner’s Replacement Rate at 65 (after Medicare Part B premium and taxation of benefits) Center for Retirement Research, 2013.

  12. How Much Do Workers Pay? • Workers pay: • 6.2% of their earnings for Social Security, and • 1.45% of their earnings for Hospital Insurance (HI) under Medicare (Part A). • Employers pay an equal amount (6.2% and 1.45%). • The total is 12.4% for Social Securityand2.9% for HI. • The maximum Social Security contribution base is $113,700 in 2013. Walker, Bethell, and Reno, 2012.

  13. Where Does the Money Go? • It is credited to the Social Security trust funds. Projections of income and outgo of the trust funds are made by the Office of the Chief Actuary of the Social Security Administration. Board of Trustees, 2013.

  14. 2012 Finances Trust fund income = $840.2 billion (mostly contributions) Trust fund outgo = $785.8 billion (mostly benefits) Surplus =$54.4 billion • By law, surpluses are invested in U.S. Treasury securities and earn interest that goes to the trust funds. SSA, 2013c; Board of Trustees, 2013.

  15. Where is Social Security Income From?Shares of Income to the Trust Funds, 2012 SSA, 2013c.

  16. What are Social Security Reserves, or Assets? • Social Security income that is not used immediately to pay benefits and costs is invested in special-issue Treasury securities (or bonds). • The bonds earn interest that is credited to the trust funds. • The accumulated surpluses held in Treasury securities are called Social Security reserves, or trust fund assets. • The Treasury securities are secure investments that are backed by the full faith of the United States.

  17. How Big are Social Security Trust Fund Assets? 17 Board of Trustees, 2013: Table VI.F8.

  18. The Long-Range Projection(Best Estimate) • In 2021, revenues plus interest income to the trust funds will be less than total expenditures for that year. Reserves will start to be drawn down to pay benefits. • In 2033, trust fund reserves are projected to be depleted. Income is projected to cover 77% of benefits due then. • By 2087, assuming no change in taxes, benefits or assumptions, revenue would cover about 72% of benefits due then. Board of Trustees, 2013.

  19. The Actuarial Deficit(Best Estimate) The long-range deficit is 2.72% of taxable payroll. This Means: The gap would be closed if the Social Security contribution rate were raised from 6.2% to 7.7% for workers and employers. 19 Board of Trustees, 2013.

  20. Why Will Social Security Cost More in the Future? • The number of Americans over age 65 will grow because: • Boomers are reaching age 65 • People are living longer after age 65 • Birth rates are projected to remain at replacement levels. • People 65 and older will increase from 14% to 21% of all Americans. 20

  21. Social Security Financing 21 Board of Trustees, 2013: Table VI.F4.

  22. Options for Raising Revenues Options that would help raise revenues include: • Lift the cap (now $113,700) on the earnings on which workers and employers pay Social Security contributions. • Schedule modest contribution rate increases in the future when funds will be needed. • Dedicate progressive taxes to pay part of Social Security's future cost. Reno and Lavery, 2009.

  23. Other Options for Solvency Some proposals would reduce benefits for some or all beneficiariesin order to increase solvency. • For example, raising the retirement age amounts to an across-the-board cut in benefits, which also reduces the program’s cost. • Switching to the chained CPI is also a benefit cut for all beneficiaries, because Social Security’s cost-of-living adjustments (COLAs) would be smaller each year. Reno and Lavery, 2009.

  24. Chained CPI • Consumer Price Index • Measures the cost each month of a market basket of goods that average Americans may purchase • Indicator of the inflation rate • Applies to many federal programs • What is the Chained CPI? • Includes an adjustment for product substitutions by consumers in response to price changes • Example: Beef prices rise much higher than chicken prices, and consumers buy less beef and more chicken

  25. Public Opinion on Social Security  

  26. Most Americans are Willing to Pay More to Keep Social Security Solvent Tucker, Reno, and Bethell, 2013.

  27. Support for the Preferred Package of Policy Options in Trade-off Analysis 27 Tucker, Reno, and Bethell, 2013.

  28. Recap • Benefits are modest (dollars and replacement rates). Yet they are most beneficiaries’ main source of income. • Benefits will replace a smaller share of earnings in the future than they do today (replacement rates are already declining and are projected to decline further in the future). • Revenue increases or benefit cuts will be needed to balance Social Security. • Lawmakers have many options to raise revenues andimprove adequacy. • Americans value Social Security and are willing to pay for it.

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